Posts Tagged ‘Pension Plans’

A couple of recent articles on retirement programs caught our eye. First was the February 27, 2010 article by Dan Fitzpatrick in the Wall Street Journal (Retirement Benefits for BofA’s Lewis: $83 Million). The article’s title alone is eye opening, and Fitzpatrick goes on to say: Mr. Lewis, who retired Dec. 31 …. According to [a securities] filing … is eligible for about $57 million in pension benefits, about $11 million in deferred compensation and an additional $4.6 million in vested and unvested stock.”

Wow, we hope Mr. Lewis has a pretty big nest built to hold that retirement nest egg! Lewis’s retirement payment seems even more fantastical when contrasted to the February 10th article in World at Work “Employers Plan to Restore 401(k) Match in 2010, Survey Finds” that says: “… high on employers’ priority lists for 2010: restoring company 401(k) matches that were suspended or reduced during the market downfall…”. The article goes on to say: “… [there is] a continued emphasis among employers on automating 401(k) plans to help workers maximize the benefits of their retirement plans.”

Few companies still offer defined benefit retirement plans to employees. In the early 80’s a cheaper option appeared in the form of 401(k) plans, and before long many companies froze employee pensions and replaced these expensive balance sheet drainers with 401(k) plans. For employees who contribute their own money many companies will kick in a matching amount, most often around 3% of employee pay (assuming the employee puts in 6% of pay).

So without defined benefit pensions what might an employee with only a 401(k) retirement savings expect to have as a nest egg?

An article titled “What are Average Retirement Savings for Different Age Groups?” (taking data from the Congressional Research Service (CRS), Retirement Savings and Household Wealth in 2007), 401(k) Planning.org says, “The more time that a person has until reaching retirement (i.e. the younger), the greater the opportunity to make additional contributions and for investment earnings to build up his or her retirement account balance. Unfortunately, the best retirement savings by age data available predates the 2008-09 financial meltdown.”

If we look at this data for the group of folks most close in age to the 62 year old Mr. Lewis, the average account balance (for people age 55-64) is $272,000 and the median is $100,000–a far cry from $83 million.

In our November 9th blog, “The Haves vs. The Have Not” we say: “SERPs have the ability to create an elite “management aristocracy” (based on money not bloodline) with the management “haves” having lots and lots of money with which to retire. There is no question in our minds that a backlash from Main Street, coupled with pressure from media and government will soon bring heightened focus onto these non-qualified plans.”

But let’s go a behind the numbers.

There are other significant differences between executive pensions and employee retirement programs. The first is that executive pensions–especially those that result in numbers like $83 million– are “unfunded and non-qualified”. They are called SERPs (supplemental executive retirement programs) and essentially they are unprotected benefits. Executive pensioners would stand behind general creditors for payment in the case that a company went bankrupt. 401(k) plans are fully funded and are protected from creditors, if not from market losses.

Another major difference between SERPs and 401(k)s are that SERPs are used as powerful retention tools when they are properly designed. 401(k) plans, on the other hand are best known for their portability. That is, you can take your account with you when you leave a company and roll it over to an IRA or a new employer’s plan without tax consequences. Retention tools, they are not.

For more Grahall perspectives on employee and executive benefits read:

Pulitzer Prize-winning journalist Paul Ingrassia and Staff Writer Imogen Rose-Smith wrote a disturbing account of the potential risk to the country’s pension system in a lengthy article for institutional investor titled “Trillion-Dollar Pension Crisis Looms Large Over America“ . The authors say: “As the U.S. slowly pulls itself out of recession following the worst financial debacle in more than 70 years, another potential crisis is looming on the horizon. The country’s pension system — both public and private plans — faces trillions of dollars in unfunded liabilities and has little hope of ever being able to meet them.”

We asked Grahall’s Robert Cirkiel for his take on this.

This is generally acknowledged to be an issue, but more so for the public sector. In fact, the unfunded liability for Social Security alone is $17.5 Trillion. Together with Medicare, the unfunded liability is anywhere between $53 Trillion and $107 Trillion depending who you ask. This is all off-balance otherwise US debt would be rated as junk. It is junk but it’s just not rated this way.

Private sector pensions have been underfunded for a while too but not as severely and besides, private sector pensions are not all that prevalent anymore. Back in 2006, the Pension Protection Act was enacted requiring all private pension plans to be adequately funded within seven years. That was when the market was GOOD! A crash wasn’t even anticipated in the Act’s language. If you follow the news, private pension plans one-by-one are going the way of the dodo bird. They either terminate, freeze, or are taken over by the Pension Benefit Guarantee Corporation, the pension version of the FDIC. This movement away from defined benefit pension plans is logical. Companies cannot allow their pension plan liability to bankrupt them. (Consider this another example of the “efficient economy”.) But at least these private pension plans are insured.

The public sector has always relied on “the unbridled taxing authority” of the sponsor. In fact, the taxing authority has always been the counter argument to the existing of a funding crisis in that it implies that there is no need to prepay the unfunded liability and that like Social Security, the funding need not be more rapid than “pay-as-you-go.”

For more on Grahall’s and Robert Cirkiel’s perspective on the pension landscape the relationship between retirement savings and workforce strategies and how to fix the problems read:

The country’s pension system — both public and private plans — faces trillions of dollars in unfunded liabilities. This special report examines what General Motor’s historic bankruptcy has to teach about the looming pension crisis, while pointing to alarming parallels between GM and cash-strapped California, whose pension crisis may already have arrived.

WASHINGTON/BOSTON (Reuters) – Ten large U.S. companies paid senior executives a total of $350 million in the few years prior to dropping traditional pension plans for employees, a Congressional watchdog said on Thursday.

Forty executives in a range of industries received the compensation in base salaries, bonuses, severance and perks in the five years before the pension plans failed, the non- partisan Government Accountability Office said in a new report.

Ten large U.S. companies paid senior executives a total of $350 million in the few years prior to dropping traditional pension plans for employees, a Congressional watchdog said on Thursday.

Forty executives in a range of industries received the compensation in base salaries, bonuses, severance and perks in the five years before the pension plans failed, the non- partisan Government Accountability Office said in a new report.

As Bloomberg’s Peter Eichenbaum shares (in his September 24, 2009 article “American Express Plans to Reverse Compensation Cuts“) “American Express Co., the credit-card issuer that repaid the U.S. bank bailout program, plans to reverse compensation cuts imposed seven months ago because the economic outlook has improved. Annual merit increases and contributions to retirement plans will resume in January, and a 10 percent salary reduction for managers in the senior vice president ranks and above will be rescinded, according to a memo from Chief Executive Officer Kenneth Chenault to employees.”

That announcement likely put smiles on the faces of many American Express employees. And as a public relations move it might also have eased some investors’ minds with its suggestion that American Express’s financial outlook has improved. But we wonder if the “same dance in the same old shoes ” really is the right step for American Express? Is the company missing a great opportunity? Continue reading “Same Dances in the Same Old Shoes – The Eagles” »

The financial crisis has blown a hole in the rosy forecasts of pension funds that cover teachers, police officers and other government employees, casting into doubt as never before whether these public systems will be able to keep their promises to future generations of retirees.

There seems to be a two-tiered system between compensating high-level executives and rank-and-file employees at S&P 500 companies, according to Jack T. Ciesielski, known for digging into companies’ financial figures in his research publication, The Analyst’s Accounting Observer. The study shows that S&P 500 companies put in less money into employee pension plans than into management’s stock grants and options.

The threat level employers feel now regarding the world’s financial crisis is significantly more serious than it was six months ago, according to a follow-up survey by the International Foundation of Employee Benefit Plans (IFEBP).